Pricing of Industrial Products

The industrial marketers should understand the various aspects of the pricing, since pricing is the most critical part of industrial marketing strategy. Different strategies such as market segmentation strategy, product strategy, and promotion strategy are related to pricing strategy. In order to achieve the dual objective such as to meet the company objective and satisfy the market needs, the industrial marketer has to integrate the various strategies. When the members of buying committee of a buying firm, purchase a particular industrial product, they are buying a given level of technical service, product quality, and delivery reliability. The other elements such as the reputation of the supplier, friendship, a feeling of security and other personal benefits flowing from the buyer-seller relationship are also important. The bundle of attributes expecting by the buying committee are fall under three categories. (1) Product specific attributes (2) Company related attributes and (3) Sales personal related attributes. Therefore, the total product includes much more than its physical attributes. In the same way the cost of industrial products includes much more than the seller’s price. Hence, decisions on pricing and products are inseparable and must be balanced with in the firm’s market segmentation plan.

Characteristics of Industrial Prices

  1. Price is not an independent variable. It is intertwined with product promotion and distribution strategies.
  2. The real price an industrial customer pays is quite different from the list price; this is because of the factors like delivery and installation cost, training cost, discounts, financing cost, trade in allowances etc.
  3. By changing the quantity of goods & services provided by the seller, changing the premiums and discounts that are offered, changing the time and place of payment and also in numerous other ways prices can be changed. Compare to product and distribution decisions, the decision regarding pricing is more flexible.
  4. The complimentary and substitute product sold by the same company should be considered at the time of deciding price for industrial goods.
  5. Prices can be resolved through negotiation in many a cases. In most of the cases the industrial prices are established by competitive bidding on a project by project basis.
  6. Industrial buyers who are experienced and able to estimate the vendors approximate production costs expect the increasing price to be justifiable on the basis of either increasing cost or improvement in product. Hence, industrial pricing is often characterized by an emphasis on fairness.
  7. Industrial prices are affected by several economic factors such as inflation, change in interest rates, fluctuation in exchange rates etc. This problem is particularly critical for the marketer locked into long term contract with no escalation clause.

Industrial Pricing Objectives

The objectives of industrial pricing should be derived from the firm’s marketing and corporate objectives. Some of the pricing objectives which industrial firms can pursue are discussed below.

  1. Survival: Survival is one of the short term objectives for many industrial companies. Due to intense competition and other reasons the firm may be unable to sell its products. For the survival of the firm it reduces the prices to convert the inventory into sales. The survival is more important than prices. The prices are fixed in such a way that they cover variable cost and a part of fixed cost so that the company continues in business. Survival is only a short term pricing objective and in the long run the firm must increase its prices to cover total cost and end up with some profits.
  2. Maximum short term sales: To maximize the sales revenue in the short run is the pricing objective for some firms. The belief behind such an objective is that by maximizing sales revenue in the short run the firms will have growth in terms of market share and also have profit maximization.
  3. Maximum short term profits: Setting prices with the objective of maximization of profit in the short run may be pricing objective of some of the marketing firms. These firms estimate the market demand and costs at alternative prices and select the price that maximizes the present profits. Estimating demand and cost is very difficult. This objective emphasizes on short term profit maximization rather than long term performance and customer relationships. The competitors reactions and legal implications are not considered by the companies adopting this objective.
  4. Market penetration: Based on the assumption that the market is price sensitive and that the low prices will increase sales; the prices of products are fixed as low as possible by some firms with the objective of maximizing sales volume and market share of its products. The other assumptions underlying are low prices will discourage entry of potential competitors and highest volume will reduce the production and distribution cost and leads to higher profits in the long run.
  5. Maximum market skimming: In the initial stages of the product life cycle high prices are fixed by some firms when they introduce new and innovative products. The new product is initially aimed at those market segments where demand is least sensitive to price. The firm skims maximum revenue and profits by adopting the skimming objective of pricing. The prices are lowered as the time passes and sales slow down to attract new customers from price sensitive market segments. To maximize sales revenue and profits is the objective in market skimming. The assumption made in this strategy is that different prices can be charged to different segments of customers at different times. There is also a possibility that the competitors will be attracted because of high profits resulting from high prices in this strategy.
  6. Product-quality Leadership: By producing superior quality products and charging little higher prices than the competitors price the industrial marketing firm may have an objective to be product quality leader in the market. This pricing objective results in higher profits.
  7. Other pricing objectives: The other pricing objectives such as to meet or prevent the competition, to stabilize the market, to avoid government intervention etc. may be considered as objectives of pricing by many industrial marketers.

Demand Analysis

The concepts of demand curve and price elasticity are very useful in understanding the relationship between demand or sales volume and price. In measuring the price and demand relationship, the other factors like promotion and customer service should be controlled since these factors also affect the demand. The basic purpose of estimating demand curve is to determine the extent of change in demand for a product with the change in prices. The price sensitivities of many buyers will be summed up in demand curve. The demand curve indicates the degree of price sensitivity. The demand is inelastic if it changes very less with a small change in price and the demand is elastic if it changes substantially with a small change in price. The following formula is helpful in determining the price elasticity of demand:

Price elasticity of demand =  Percentage change in quantity demanded / Percentage change in Price

The industrial demand is likely to be inelastic under the following conditions:

  1. There are few competitors
  2. Non availability of substitute products from other industries; and/or
  3. The buyers think the higher prices are justified by normal inflations or changes in government policies on excise duty or sales tax and other.
  4. Since the industrial products are technically sophisticated, the demand for these products is relatively inelastic.

Competitive Analysis

Competitive level pricing is considered as an important pricing strategy used by many industrial marketers for the purpose of pricing of industrial products. The information on product quality, technical expertise, and delivery performance of the competitor should be analyzed along with the price and cost information. The information on the product quality, prices and delivery performance of the competitor’s product can be obtained by the industrial marketer through his sales force. By appointing a marketing research firm the industrial marketer can get the competitors information. Based on the available information about the competitors the industrial marketer can use price as a mechanism to position the product. The industrial marketer is considering a change in price he has to forecast the reactions of competitors and customers. An industrial marketer must study the actual sales, costs corporate objectives, financial situations, utilization of production capacity and strengths and weaknesses. The reactions of the competitors should be anticipated soon after collecting the information on competitors. A competitor’s response depends on his mindset. The competitors are likely to respond when the number of industrial buyers is less, the buyers are aware of price change and the products are similar.

About Abey Francis

Abey Francis is the founder of MBAKnol - A Blog about Management Theories and Practices - and he's always happy to share his passion for innovative management practices. You can found him on Google+ and Facebook. If you’d like to reach him, send him an email to: [email protected]
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